Examining the R.O.I. on Customer Retention

A widely accepted marketing truism is that growing sales through existing customers is easier and cheaper than winning new customers. At first blush this sounds reasonable. You are in contact with customers who have already purchased from you. Since they’ve already responded to your bid for their attention, there is a good likelihood they will again. This “path of least resistance” may seem like a no-brainer to marketers. The reality, though, is that you are potentially wasting resources on an assumption that isn’t supported by critical examination.

Does retention marketing give as healthy an ROI as marketing to new customers?

In this article we will assess the prospects and process of marketing to an existing customer base. We’ll use a made up company, OmniMall.com for illustrative purposes.

Let’s start with our example company’s stats:

OmniMall.com, is an online clothing giant that targets 55-62 year old women. It currently has a 20% market share of the 10-million buyer pool. The industry averages approximately 10% turnover a year. The math here leaves us with 2,000,000 customers and an attrition rate of 200,000 customers each year.

With these numbers in mind, our targeted messaging options are as follows:

Retain the 200,000 annually defecting customers

Attract our competitors’ 800,000 annually defecting customers

Attract new buyers from outside the current buyer pool

First, let’s address customer defection.

Understanding why customers leave informs what it would take to make them return. Will the costs required to keep them outweigh the revenue? Can these fickle buyers be retained at all?

There are two main costs to consider when crafting your retention marketing strategy: cost of diagnosis and cost of retention.

Cost of Diagnosis

This is the first, often overlooked, cost of retaining customers. Customers leave for many reasons and OmniMall.com will have to spend resources figuring out which customers have left and why. Basing your assessment solely on buying patterns means that some time will have passed before the customer can be categorized as ‘lost.’ By then the customer is often in a honeymoon phase with the competition.

Before you can reach out to your defecting customer, you have three challenges:

Know the customer has left,

Determine why they left,

Re-engage the customer in a way that successfully cures their reason for leaving.

Cost of Retention

Building and maintaining customized programs to counter the main drivers of customer attrition is a huge challenge. Unlike the core messaging effort for OmniMall.com—which is highly developed and used to win new customers —retention programs must present a specific ‘solution’ to counter each cause of customer defection. These messages run in parallel to the core brand message and are focused on the ‘issue’ instead of the value proposition that won the customer in the first place. They each require their own strategy, content, execution, measurement and support — all of which require resources.

Wooing back the defecting customer through customized counter-attrition programs is an expensive proposition with low odds of success.

There are five main types of defecting customer. As we break them down, it will become more clear why the cost of diagnosing and retaining these customers is a drain of marketing resources (resources that could be more successfully spent on new customers).

The “Unrecoverables” – First, it is clear that not all of our departing customers are recoverable at all. From divorce and bankruptcy to incapacitation or death, many customers will experience life altering situations that make remaining our customer untenable. Let’s put that number at 25%. That reduces the potential customer retention pool to 150,000 (and we still carry the cost of diagnosis).

The Bad Experience Group – The best customer to recover, perhaps, is from the bad experience group. At least some of them would have continued to be long-term customers if not for their negative experience. If we can figure out what went wrong, apologize and ‘make it up’ to them in some way, we might save a long-term buyer and some will actually become evangelists in appreciation of our effort. Here again, however, we are hit by the cost of diagnosis. Most good customers who have bad experiences just quietly go away. We don’t know why they left and it’s hard to find that information out. Just knowing they left because of a bad experience still leaves us wondering what that experience was. It could have been anything from a late delivery to a poor quality clothing item. If they do make it known, then they are worth aggressively courting because they have mitigated the cost of diagnosis, are still receptive to the core value proposition and may not only stay on as a customer, but could become an evangelist.

Perpetually Dissatisfied Customers – There will always be perpetually dissatisfied customers who tax customer support resources with little hope of making them happy. Some of these PDCs are gaming the customer support process to get free or reduced-priced goods. Your bottom line is happy to see PDCs move on to the competition.

Price-sensitive – Price shoppers can potentially be wooed back with discounts. The lifetime value of this customer plummets because one discount won’t be enough — your price buyer requires continued discounting to continue shopping. These buyers will find their own way back when the deals warrant it.

The bored customer – Customers move on. Familiarity is a breeding ground for apathy. Other shopping outlets are constantly seeking to woo your customers, and sometimes the customer is ready to be wooed. Similar to the Price Shopper, you may keep them around for a while, but every year requires even more tantalizing reasons to stay.

Customer defection is linked to a few common reasons—from bad experiences to price sensitivity to loyalty issues—none of which is very attractive from a retention standpoint. It’s important to consider the lifetime value of the customer as it relates to the true cost of retention as well as the lost income from new customers we could have gained with the resources used to retain the existing customers.

By now you’ve figured out that I’m highlighting the costs of retention and can guess what’s coming next – the benefits of winning new customers.

Winning new customers is the lifeblood of growth. It counters attrition and brings in customers who are beginning their customer life cycle with the company, as opposed to dangling off of the edges. It leverages the strongest brand asset—your core message—as opposed to enticing back users with off-message programs.

I’ve pointed out the unsustainability of many retention efforts – especially for the price sensitive or bored shopper. If you attempt to keep your price sensitive or fickle customer, you have used your resources to identify and supplicate a potentially low value customer when those resources could have been used to win a new, full price customer. More than a 1 to 1 trade-off ratio, there is additional opportunity cost in forgoing new customers who would have become heavy users. Our strongest customers are the least likely to leave and thus our retention efforts will be heavily skewed towards light/normal buyers. Thus a group of new customers will yield some number of strong customers in accordance with our normal distribution of strong customers, where the retained buyers will contain less heavy users. Your new customer has a 90% chance of continuing on as a regular buyer (and you skip the additional costs of retention and diagnosis).

Theoretically, all efforts resulting in a positive R.O.I. should be undertaken. Most companies, however, do not have the infrastructure in place to pursue every strategy with net positive return. Understanding the true R.O.I. on resources should guide your allocation. The SPG has a growth first philosophy. Growth that aligns with the core competencies of the company is the surest way to build sustainable value and market share.